Standard vs. Itemized Deductions

When completing a tax return, taxpayers have two options: take the standard deduction or itemize their deductions. Most taxpayers use the option that gives them the lowest overall tax. Due to all the tax law changes in recent years, including increases to the standard deduction, that means taking the standard deduction – but not always. Let’s look at a few details about these two options.

Standard deduction

The standard deduction amount increases slightly every year and varies by filing status. Factors that affect the standard deduction amount include the taxpayer’s filing status, whether they are 65 or older or blind, and whether another taxpayer can claim them as a dependent. Taxpayers who are age 65 or older on the last day of the year and don’t itemize deductions are entitled to a higher standard deduction.

Most filers who use Form 1040, U.S. Individual Income Tax Return, can find their standard deduction on the first page of the form. For most filers of Form 1040-SR, U.S. Tax Return for Seniors, the standard deduction is on page 4.

Not all taxpayers can take a standard deduction. Those taxpayers include:

  • A married individual filing as married filing separately whose spouse itemizes deductions – if one spouse itemizes on a separate return, both must itemize.
  • An individual who files a tax return for a period of less than 12 months. This situation is uncommon and could be due to a change in their annual accounting period.
  • An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien can take the standard deduction in certain situations.

Itemized deductions

Taxpayers who choose to itemize deductions should file Schedule A, Form 1040, Itemized Deductions. Itemized deductions that taxpayers may claim include:

  • State and local income or sales taxes
  • Real estate and personal property taxes
  • Home mortgage interest
  • Mortgage insurance premiums on a home mortgage
  • Personal casualty and theft losses from a federally declared disaster
  • Gifts to a qualified charity
  • Unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income

Some itemized deductions, such as the deduction for taxes, may be limited. Don’t hesitate to contact the office for more information on these limitations or any other questions.

Questions?

If you’re wondering which option is right for you, feel free to give us a call.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Year-End Charitable Giving Tips

As we approach the end of the year, thoughts turn to generosity and gift-giving. Many people choose to do most or all their charitable gifting at the end of the year.

For those that itemize, charitable contributions are taken as an itemized deduction on their individual tax return. For tax year 2021, even if you don’t normally itemize on your tax return you can take an adjustment to your adjusted gross income of up to $300 ($600 for married individuals filing joint returns) for your cash donations.

Below is our list of year-end charitable giving tips:

  • Save all records of cash and non-cash donations
    • This includes donations made by check or credit card
    • If your donation is a cash donation of $250 or greater, you should receive a letter of acknowledgment from the receiving organization
    • Take pictures of your non-cash donation receipts
      • Goodwill
      • Salvation Army
      • Etc.
  • Consider making the donation with your credit card for cash flow purposes
    • You can make the donation by 12/31/2021 and not need to pay until the statement date in 2022
  • You may be eligible to deduct travel and out-of-pocket expenses incurred for charities
    • Must be a qualified charity and your time must be for real and substantial services to the charity
      • You cannot deduct for your time or services provided to the charity
    • Travel you can deduct (you cannot deduct travel if a significant portion of your trip is for recreation/vacation)
      • Flights and public transportation
      • Vehicle expenses
      • Lodging costs
      • Cost of meals
      • Taxi, rideshare, or other transportation costs between the airport or station and your lodging
    • Out-of-pocket expenses that can be deducted must be necessary and must be
      • Unreimbursed
      • Directly related to the time/services provided to the charity
      • Directly related to services provided
      • Not personal, family, or living expenses

Other tax-advantaged charitable giving includes Qualified Charitable Distributions (QCDs) and donations of appreciated stock or other assets.

To learn more about how your generosity can benefit you come tax time, please reach out to email@wheelercpa.com or call our office:

San Jose: (408) 252-1800

Watsonville: (831) 726-8500